I believe the most important first step is to learn to live within
your income. In today's society, this may seem like an unique
concept. It didn't used to be that way.. In fact, prior to the advent
of credit cards in the 1950s, living within one's income was
not unusual. About the only credit available was a home
mortgage and a car loan. The terms of these loans weren't as
liberal as today. There was no 30-year mortgage. You couldn't
finance a car for more than three years. Sure there were store
charges, but they weren't revolving charges. They had to be
paid for at the end of the month.
Homeowners made do with what they had. Appliances, cars,
etc. were repaired rather than replaced. If they couldn't
afford to buy what they needed or wanted, they waited
until they could. Many Americans think only of the present
rather than their future needs when spending their income.
The feeling is if we can pay our debt service each month on
time everything is fine. So we continue to create new debt until
we can't afford any more debt. Unfortunately, some go past
this point without a thought of the consequences until we
are in deep trouble.
Most consumers don't realize is by having credit debt,
including a mortgage, they are seriously jeopardizing their
ability to create retirement wealth. The fact is many Americans
are only two paychecks away from financial failure because of
their spending habits.
The next step is to pay yourself first by paying off all your
debts, including your mortgage, before investing or even
saving. This is probably an unfathomable concept to a
financial planner. Paying off a credit card with a 15% APR
is the same as receiving an equivalent return of 15% from
an investment. In addition, this return is guaranteed. Ask
your stockbroker to insure the percentage of return on any
stock he recommends.
Using the model of the average American family that I use in
my seminars, I show that this family would realize a 37.13%
return on their money by investing in their debt of $169,340
before any other type of investment.
Furthermore, let's assume this same family invests 10% of their
monthly gross income ($427) to eliminate their debts first
rather than investing it in an investment vehicle yielding a 10%
return. The long term result by investing in their debts first is
they would build a retirement nest egg of 1.8 million dollars
over the same the same period it would have taken them to
pay off their mortgage in the normal way. The person who
invests first would accumulate about 600 thousand dollars,
1.2 million dollars less. Both families established a six
month contingency fund.
After all your debts are eliminated, the money you were using
to pay your debts is now available for any purpose you chose.
To become debt free can take from 5 to 10 years, many years
before the time required to pay off the mortgage alone. What
also is important to understand is that by freeing yourself from
debt you are not at risk to financial misfortunes such as a loss
of income. You probably could survive on unemployment
compensation if necessary or savings.
The last step is to create wealth by investing your money in
low risk investments over a long period of time. A debt free
60-year-old may have insufficient time to build real wealth.
However, without debt even the 60-year-old still can enjoy a
debt free lifestyle. On the other hand, a young person could
conceivably amass over $1,000,000in retirement wealth. One
million dollars is the nest egg amount USA Today said that the
average baby boomer earning $50,000 annually today will
need to retire to enjoy the same lifestyle they had before
retirement.
I recommend you invest for the long term using dollar cost
averaging. This means you invest the same amount of
money each month no matter if stocks are rising or falling.
It may be wise to invest in an indexed mutual fund such as
the Standard & Poors 500 which usually has a higher return
than stocks that you might choose.
My purpose is not to give investment advice since that
isn't my area of expertise. What I'm attempting to do is
provide some basic thoughts so you don't have to become
an investment wizard.
The return by following these three steps will astonish you.
Think about how much extra income you would have
when you have eliminated your debt payments. I suggest
you add up the amount of money you spend each month
on debt payments. This exercise might encourage you to
really consider a debt free life style. Without debts your life
could be be less stressful. Your marriage and family life
might be more enjoyable. You then could build wealth for
a happy, comfortable lifestyle.
Begin now then to eliminate all of your debts before saving
or investing. Then create a nice retirement nest egg by
investing the money you were putting towards debt
payments in conservative, low risk investment stocks,bonds,etc.
Don't forget most Americans believe that "everything will just
work out." It doesn't happen that way. It's up to you take action to
build real wealth and to achieve financial freedom.
